What is the difference between comparative advantage and absolute advantage?

Question

Which is more important from an economic viewpoint?

Answer 1

This is usually used in terms of international trade.

Absolute advantage is when one country is better at making a product than another country.

Comparative advantage takes into account the country's relative cost. So if you produce something at home, you have to use limited resources that could be used to produce other things. So comparative advantage is one country has better relative cost in making a product in relation to building other products.

There are several examples on these links.

comparative advantage is more important. It is a more thought out model, and is an argument for international trade, and shows where all involved would be better off.

Answer 2

Let's say the soil and labour costs in country A are such that it can produce bananas at a cost of 50 cents a kilo. In country B, they can produce them at 30 cents a kilo. Country B has the absolute advantage.

Now let's suppose that country B has good copper ore that allows it to produce copper for 40 cents a lb. Cuntry A has poor copper ore that can be mined only at a cost of 90 cents a lb. Again country B has the absolute advantage.

But assuming that both countries have only a fixed (in the short run, anyway) availability of labour and capital (money, ports, roads etc), A will have the comparative advantage in one of those products, depending on the world market prices for copper and bananas, even though it has the absolute advantage in neither. It will be economically best for B to specialise in one product and for A to specialise in the other, and to trade with each other. That is why comparative advantage is more important than absolute.

Answer 3

Absolute and comparative advantage are economic concepts relating to importing and exporting.

Absolute advantage simply means "I make more than you." In other words, a higher quantity is produced by you. But that doesn't mean you're any good or efficient at it!

However, comparative advantage means "I'm more efficient, or better at making it than you." In other words, while you may be making more of it, I'm actually better at producing it than you.

In economics, the most important one is comparative advantage. A country should export what they have comparative advantage in, and import what they have absolute advantage in.

Why? Because comparative advantage measure efficiency in one's production, while absolute advantage only looks at how much one can actually make.